Finding the Right Startup Loan for Your New Business

What are the main things to consider when looking for your ideal business startup funding package? Answer4u investigate the options available.

So, what are the main things to consider when you look for your ideal startup funding package?

With record numbers of startup businesses being created in the UK, it’s clear that there is currently a real appetite for entrepreneurship across the country.

Companies House has reported that there were 620,285 company incorporations in the 12 months to March 2018. This does represent a decrease of 3.8% when compared with the previous 12 months but is the first time there has been a decrease in company incorporations since 2008/09. However, compared with the 12 months to March 2016, there was an increase of 1.5%.

However, it’s not all positive news – reportedly, more than half of new businesses don’t survive beyond five years, with the UK tax system, a lack of bank lending and the cost of running a business often cited as the top reasons for failure.

So if you’re planning a startup business, or are already in the early stages, it’s more important than ever to get the right funding in place from the beginning – and to not necessarily rely on the high street banks.

Know the Type of Funding That's Right for You

It’s well worth spending some quality time checking out the market for what might be available.

In addition to startup loans (which are often personal loans to be used for a business), there are traditional business loans and overdraft facilities to choose from. The rise of alternative funding certainly hasn’t ruled them out as an option.

Know the Type of Funding That's Right for You

However, according to Business, British businesses are shunning the ever-increasing restrictions placed on them by high street banks in favour of cash and alternative forms of finance. They say that only 13 per cent of UK small businesses relied on the standard high street bank to finance their business, with almost one in four SMEs (23 per cent) moving to asset finance, operating or finance lease.

There are also alternative lenders such as Funding Circle with its peer-to-peer lending, and other options such as invoice finance and asset finance (where money can be borrowed against your outstanding invoice values or secured against your business assets). They’ve also published a helpful article on the difference between crowd funding and peer-to-peer lending, and when each type may be best for a business.

There’s also more information on crowd funding as an alternative to bank lending on the Startup Donut website, including a link to CrowdCube, which offers investment in return for an equity stake.

Crowd Funding as an alternative to bank lending

The UK government is also once again a helpful source when considering different types of funding, offering a guide to the different types available and the eligibility criteria for them.

There are also commercial finance brokers available who can support you in both finding and applying for funding for your business. The National Association of Commercial Finance Brokers offers information about the different types of funding available through its members, as well as an online database to help small companies find a local accredited broker.

You may also want to look at loans tailored for a particular purchase need, such as a commercial property loan or mortgage for premises or heavy equipment (plant).

A lot will depend on where in the startup journey your business is, what collateral you can offer, what the money is for, your financial structuring and your credit rating.

Remember to check all the small print – should the worst happen and your new business fails, how liable will you be personally for any outstanding debt, and will you be able to repay it?

A sensible option is to talk to an independent advisor, or a commercial finance broker, who can access a range of funders and get a quote for a loan or other financing arrangement tailored to your needs and individual circumstances. Shop around the market – don’t just jump in at the first offer of finance.

The website Startup Donut has an excellent step-by-step guide to financing your startup, working through the stages of calculating what you need through budgeting and contingency planning, assessing what type of funding is right for you, considering investment finance, establishing your creditworthiness, and negotiating overdrafts, loans and other financing.

The Traditional Route to Funding

Traditionally, anyone with an idea for a new business or a company requiring investment for growth would send its owner or MD for a formal interview at the bank. Their future would literally lie in the hands of a manager who would decide whether or not the right boxes had been ticked before they approved a loan. Thanks to developments across the finance industry over recent years, the high street lenders are no longer all-powerful and companies can even bypass the banks entirely and apply for various different alternative funding options. Alternative funders may have more leeway in their criteria and offer more lateral thinking than the old fashioned tick box system, but companies looking for funding still need to cover the basics.

Alternative Lenders

The emergence of alternative lenders doesn't mean that actually pitching for funding has swung so far from the traditional as to always be like the pressure cooker environment of "Dragons' Den", with wealthy investors pulling apart the dreams of many aspiring entrepreneurs. The hit programme from the BBC and its slightly more sinister sounding US counterpart "Shark Tank" are, after all, mostly designed to entertain the viewers with a bit of business thrown in.

But when you're searching for the right investor, while the format may change, the basic requirements and difficult questions will remain the same – whether you're facing dragons, sharks, bank managers or other investors.

To access funding, it’s not enough to just have an idea. You need real, documented intelligence on how your business will run, how you’ll produce your goods and services and the costs involved, and the turnover and profit you expect to make. Even if you’re borrowing from friends or family you still need to be sure you can pay them back.

Know Your Business - Do I Need a Business Plan?

Do I Need a Business Plan?

Yes. Before you go out looking for funding, you do need to have a good understanding of your business plan. You need to know what your company is going to do, how and where you’re going to do it, who your competitors are – and who they may be in the future, and how you plan to grow your business, including key milestones.

Anyone considering giving you funding will need to assess the risks and decide whether they’re willing to gamble on your success. (That really should be the case if you’re borrowing from friends or family too.)

Lenders and investors will also want to see proof that enough customers are willing to pay the right price for your product or service to enable you to make a profit and give them a return on their investment.

Where to Find Expert Help to Create a Business Plan

  • There are lots of free business planning resources available on the internet and the UK government has helpfully pulled a few of them together here.
  • Bplans, a free resource from Palo Alto Software to help entrepreneurs start and run better businesses, also offers example business plans from a range of industries to use as a helpful guide when building your own.
  • Virgin startup is an official delivery partner of Start Up Loans, and its online FAQ section offers a helpful guide to the process of applying for funding from the national scheme. They also offer business plan templates and guidance to applicants who need additional support.
  • Other delivery partners can also be found on the Start Up Loans website

Create an Appealing Pitch

As well as knowing the basics of your business, you need to be able to get your vision and enthusiasm across in your pitch, whether that’s in paperwork or a presentation.

While exciting numbers will take you a long way, investors need to have a positive feeling about you as well. Being able to create and deliver an appealing pitch should also bode well for your marketing skills and your chances of recruiting the best people to your company.

Bplans again has some templates available for download that can offer a useful framework.

If you decide to work with a broker, they will know how the lenders and investors they work with prefer to receive information and what ‘pushes their buttons’, so they should also be able to offer some support.

A great pitch should put you in an advantageous position when it comes to the negotiations before signing on the dotted line. Be prepared to work with a funder or broker to agree terms but also remember to keep your options open – you don’t have to accept the first offer you receive if the terms don’t work for you.

Know Your Financials and Calculate How Much Funding You Need

One of Dragon's Den's most celebrated successes can also be considered one of its greatest anomalies. In the programme, Reggae Reggae Sauce founder Levi Roots proved more than shaky on his financials, believing an order for 2,500kg was in fact an order for 2.5 million litres of the sauce. Despite that, he was offered £50,000 for a 40 per cent stake in his business by dragons Peter Jones and Richard Farleigh. Reggae Reggae Sauce products are now stocked in all the major UK supermarkets and Roots is worth an estimated £30m.

That sort of mix-up with numbers would signal the end of most discussions in the real world (and Dragons' Den, for that matter). What you don't see on TV is the detailed financial and legal discussions that take place away from the camera before a deal is completed, and that's the type of interrogation most entrepreneurs will face.

It’s important to think carefully about how much funding you actually need. If you don’t borrow enough you’ll have all sorts of financial problems trying to plug the gap; borrow too much and your repayments will be higher than they need to be, particularly with interest factored in.

Know Your Financials and Calculate How Much Funding You Need

To calculate your startup costs, you need to take into account spending on stock, business property, marketing, broadband and telephones, online ordering systems, professional fees, heating, lighting, transport – and that’s just for starters. You also need to do some contingency planning for unexpected expenses. The startup Donut has a helpful article that goes through how you can calculate your costs – and consider their affordability.

Your business plan should outline what size financial injection you need, what the money will be used for, and how you intend to service the debt. If you don't know the figures inside out – including how you would handle a drop in demand or an increase in costs – potential investors won't have the confidence to hand over their cash.

Remember to calculate the affordability of any financing you take on, in addition to your running costs. Don't borrow more than you need as that will simply add to your top line, but remember that short term borrowing in a crisis will cost you more than a pre-planned arrangement.

At What Stage of Developing the Business Can I Apply for a Startup Loan?

You might expect startup loans to only be available to businesses that are literally in the first throes of setting up for trade. However, the British Business Bank, through its partner the Start Up Loan company, offers loans of up to £25,000 to businesses that have been trading for up to two years – with more than 55,000 people having already received funding. Their advert from July 2018 is available on YouTube

Do I Qualify for Specialist Support for Young People?

Don’t worry, we don’t mean the Young Enterprise scheme you might have enjoyed at school – although they have now partnered with Britain’s biggest banks through the Business Growth Fund to support their annual 'Tenner Challenge'.

There’s lots of support out there for young people, including the Prince’s Trust Enterprise Programme, which offers free workshops and help to develop a business plan. If its Business Launch Group approves a young person’s business plan, they can then apply for a startup loan of up to £5,000 at a rate of just 6.2% APR representative. The programme can also offer small startup business grants in special circumstances.

How Quickly Will I Need to Pay Back the Money?

The repayment terms (also including interest rates) will vary depending on who makes the loan and your personal circumstances. The national startup Loans are paid back over between one and five years, as agreed with the delivery partner.

However, individual banks and other lenders may have different terms and conditions. Lloyds Bank has a helpful guide to starting a business, and they’re also currently offering 18 months’ free day-to-day business banking for eligible new businesses.

Barclays Bank offers 9.9% APR representative on business loans of between £1,000 - £25,000 with repayment terms of up to 10 years (APR for loans above £25,000 are provided on application), and also offers guidance on alternative funding such as a business overdraft or business credit cards.

Natwest also offers a business startup package that could include 18 months free banking, a low cost overdraft facility of £500 and no arrangement charges for its small business loans – all subject to eligibility, of course.

How to Find Investors at Events

As an Entrepreneur or a Startup business you need to be networking online and in person, events are a great place to start building connections with experts and influencers. Once a relationship has been built they might be able to help you on your journey from a one-man-band to a small business. The help will vary from investing their time by giving advice, or investing their hard earned money, either is of great value to you and your new business.

How to Find Investors at Events

Here are the three stages that will help you seek potential investors and build promising relationships via events:

1. Pre-Event

If you do your research you can discover who to look out for whilst you’re there. Take a look at the event’s website and social channels, see who’s following them and who’s posting about the event. You’ll find a few promising people to look into further and with a little bit of online stalking to find their interests, connections you can also discover their potential to help you. All are key to sparking a great connection when you finally meet them at the event.

As part of your pre-event research, search for your potential investors on Twitter. For now, steer clear of LinkedIn as that will be the connector post event, and Facebook which is usually used for more personal connections.

Twitter is far more casual, it will allow you to inconspicuously discover what your potential investor is passionate about. You could also "favourite" and "retweet" that person by doing so, you will start to make an appearance in that person’s life which will aid in provoking a feeling of familiarity on meeting in person at the event. If you’re confident enough, engage with them on Twitter by commenting on one of their posts or asking them a question, just remember to keep an eye out for their response and make sure you select a topic you know well.

Some events host a forum on their website, so ideally you should introduce yourself on this too. Basically, just do everything you can to subtly catch the eye of potential investors – it’s all about playing the professional dating game, a little bit of warming up before going in for the kill… 😉

2. The Event

Just like dating, you need to build a balanced relationship so make sure that it’s not all about you, you, you! Ask them questions, listen and respond thoughtfully, this will help to develop a solid relationship built on mutual respect and common interests. Of course, don’t forget why you’re there, just pitch subtly in conversation at the event to gain their interest, exchange contact details and if possible, book in a date for a one-to-one meeting to discuss your proposal further.

You will want to sow as many seeds as you can, so once a conversation has come to a close go out and seek another potential investor. It will be hard work on the day but totally worth it once you have established connections and gathered the personal contact details of experts and influencers who have the knowledge and money to help your business grow.

3. Post Event

Follow up after the event is essential, the first port of call is to add them on LinkedIn as soon as you get home to keep you fresh in their minds and to show your enthusiasm. Just make sure you’re LinkedIn is up-to-date and looking professional.

Maximise the full potential of your new list of contacts by sending them regular business updates, write to them individually – of course you can use the same base template but add personal details for each, whether that’s an anecdote related to something you spoke about at the event or just a personal note. They’ll appreciate the time you’ve taken to write to them personally about your business – if they don’t appreciate it they’re not right for your business or not ready to invest but good to have as a contact nonetheless.

By following these steps you will know that you’ve done everything you can to catch the attention of investors at an event. Keeping your cool by being confident but not aggressive in your approach is essential in every stage of your journey to find an investor, be quietly persistent and you’ll find an investor (or two!) that suits you and your business.

Don't Lose Heart

Don’t Lose Heart

You may hear many potential funders saying ‘I’m out’, but don’t lose heart. As long as you learn from any constructive criticism on offer and amend your business plan accordingly, the right funder may still be out there for you.

Consider Trunki, the ride-on hand luggage suitcase for children. In 2006 founder Rob Law left the Dragons’ Den with no investment after Theo Paphitis managed to snap the strap on the product. According to business website 'startups', the company kept going and in 2013 secured £4m backing from the government-backed Business Growth Fund. In 2016 Trunki celebrated its 10th anniversary and has product sales of over three million in over 100 countries worldwide.

So if you get a knock back, don’t just give up. Consider the feedback, make any changes you need, then pack some Reggae Reggae Sauce in your Trunki and keep moving until you have the right business plans in place to attract the finance you need.

Not everyone will become a billionaire – or even a millionaire – but taking the right steps when you startup will be a key factor in whether your business thrives. Make the most of the support that’s out there and consider your finances carefully to give yourself the best chance of success.

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